I have trouble communicating with people who do not appear to care about facts. One well-meaning acquaintance approached me, a public employee, and told me that the Los Angeles Times had run an article about how CALPERS (California Public Employee Retirement System) had based its projections about public pensions on the assumption that the Dow Jones would reach 25,000. Given that the Dow Jones has never been especially close to this number, this sounded like CALPERS had made a tremendous mistake. He implied that the taxpayers are being asked to pay too much toward public employee pensions and perhaps even saying that people like me should agree to reductions. I researched and found what I believe is the article to which he referred. Here is the relevant excerpt, from the Orange County Register, a newspaper not known to be friendly to public employees:"CalPERS, which in 1999 advocated retroactive pension increases based on assumed rates of investment returns that essentially required the Dow Jones industrial average to reach 25,000 by 2009, is backed by taxpayers whether its projections are right or wrong." I looked to see where CALPERS had actually made a statement or had implied that the Dow Jones would need to reach 25,000 by 2009. So I went straight to the law that enacted the pension increases in 1999, SB 400. Here is a portion of the bill where proponents say why they support it:If this benefit package is enacted, the state contribution will fall initially in 2000-2001, to 1.07% of payroll, or $103 million, due to the initial impact of the accounting change, but will increase significantly thereafter, to 4.65% of payroll in 2001-2002, or $465.6 million. The employer rate will level off in subsequent years, eventually falling below 3% in 2008-2009, but the employer contribution amount will remain in the $379 million range. CalPERS, however, believes they will be able to mitigate this cost increase through continued excess returns of the CalPERS fund. They anticipate that the state's contribution to CalPERS will remain below the 1998-99 fiscal year for at least the next decade. Overall, the benefit equity package is the equivalent to about a 2% to 2% increase in normal costs.If no changes in benefits are enacted, and current assumptions hold, the employer rate will continue to decline, to below 2% of payroll by the 2002-03 fiscal year. State contributions will decline from the $1.2 billion paid in 1997-98 to $112 million in 2005-06, a decline of about 90% in less than a decade. With the enactment of this bill, the state will not realize all of these currently projected savings. The CalPERS Board of Administration, however, has agreed to increase from 90 to 95% the assets considered in its valuation of the plans, and shorten the amortization of the excess assets to 20 years, to help mitigate the impact of the benefit enhancements on State employer contributions.” I have put in bold what I think are the most important excerpts. The comments mention state contributions (i.e. taxes to go towards funding of the pensions) to decline at least until about 2009 because of “excess returns of the CALPERS fund.” I am still unclear about where the number 25,000 in connection to the Dow Jones came from. At the time of the bill’s writing, CALPERS had gotten exceptional returns. The Dow Jones had cited CALPERS for a 20.1% return in 1999-2000. At around that time, the USA Today had said that “strapped” governments had “looked to pension funds.” The point that critics make is not without merit. When CALPERS investments go poorly in a given year, the state uses taxes to fulfill its obligations to the pension funds. To guarantee pensions in this manner may not be the best idea, they say. I can, as a taxpayer and as a public employee (who chooses not to belong to any union), identify with some of the calls for reform. Recent hires at my and other cities are promised a lesser pension if and when they work a certain amount of years (typically 30) and reach a certain age (55 or 60). The base of pension that one receives could be adjusted to their mean salary rather than their highest salary. Annual pensions could be capped at $100,000. These reforms would not likely upset the obligation of the state to fund the pensions. We need a good dialogue between those who are concerned about taxes and those who serve the public. It all begins with identifying the problem, the most relevant facts and the most just solutions.

Recently, the City of San Bernardino declared bankruptcy. Already news analysts are speculating that there will be cuts in pensions to some of the city employees as a way of bringing the city out of its fiscal crisis. Other cities voted to curb pension benefits in recent elections. Why is the possibility of cutting pensions for public employees an issue? First of all, PERS is a contract between the state of California and many of public employees in the state. The key constitutional issues of the state changing the terms of the PERS contract are the Contracts Clause and the Takings Clause (5th and 14th Amendments of the Federal Constitution):Contracts Clause - “No state shall…pass any law impairing the Obligation of Contracts”Takings Clause – if the state interferes with property rights (such as wages or pension), it may be required to provide “just compensation.” The first question in a court case of this type is whether the contract was whether the breaking of the contract caused participants to the contract trouble in preparing for retirement, difficulty in paying bills, etc. If the court concludes that contract was broken to that extent, the court next considers whether the impairment served an important government purpose, such as the protection of its citizens from harm. A court considers whether the law was foreseeable or even plausible at the time the contract was made. It can also take into consideration that when the state is faced with a budgetary deficit, the legislature has many alternatives available to it, such as reducing state services not governed by contract and raising taxes. If the impairment to the contract is not really necessary to protect the citizens, the court will rule in favor of those who brought suit on the impairment of contract (i.e. the employees).Bottom line: To win on the questions the court asks, employees will need to show that they have relied upon the pension system promised them when they became members of PERS. They will need to show that the state of California has alternatives to cutting our pensions. And, they will need to show that the idea of cutting pensions drastically was not foreseeable at the time they joined PERS. There is no sure way to tell how the courts will rule, but by emphasizing these themes will force the courts to recognize the value of the contract the government makes with public employees and the consequences of breaking the contract.